We mustn't overlook the role of politics in the eurozone crisis

Allowing Greece to join the euro was not the first time politics has triumphed over rational economics

Politics and sentimentality about Greece overcame rational economics when it came to its membership of the eurozone. Above, tanks were deployed in Athens in November 1973 during riots against the rule of the colonels. Photograph: Keystone/Getty Images

While promoting his book Back from the Brink, former chancellor Alistair Darling has found that audiences are far more interested in the financial crisis than in politics. Yet the politics of recent decades have been an important factor behind the development of the crisis, and, although things do not seem to be going too well at the moment, will be crucial to the resolution of both the crisis in the eurozone and the broader world financial and economic crises.

It has become blindingly obvious to almost everyone that it was a poor political decision to allow Greece to join the eurozone. The European Union? That was fine, as it was for Spain and Portugal too. The EU is generally regarded as having been vital for the Iberian peninsula's recovery from the fascist dictatorships that prevailed there for decades after the second world war. There were also postwar dictators in Greece: any younger readers who are unaware of the military dictatorship of the colonels could do worse than watch Costa Gavras's 1969 film Z on DVD.

Sentimentality about Greece triumphed over rational economics when it came to the country's membership of the eurozone. Other leaders felt that "the fount of democracy" could not be excluded. Ancient Greece gave us the words "democracy" and "economics". George Papandreou's call for a referendum last week brought echoes of the way the ancient kings would assemble the populace in the agora (marketplace) to, in the words of the historian JB Bury, "hear and acclaim what he and his councillors proposed. To hear and acclaim, but not to propose themselves". Unfortunately for Mr Papandreou, his cabinet, the modern equivalent of the king's councillors, were not of the same mind.

Politics also triumphed over economics at the formation of the eurozone itself. Indeed, the political background to the current crises can be traced back to the fall of the Berlin wall in 1989 and the collapse of the Soviet Union in 1991. The prospect of a greater Germany frightened not only France's President François Mitterrand but also the German chancellor, Helmut Kohl, himself. They wished to tie Germany down in Europe – a European Germany, not a German Europe. The single currency was the rope. And it had many strings attached.

The collapse of European communism led to what has been called "the triumph of bourgeois capitalism". We had already seen the ascendancy of the right in economics, under President Reagan in the US and Margaret Thatcher in the UK. This was the heyday of extreme free market economics, neoliberalism and the perceived importance of financial markets as opposed to the real markets that bring us goods and services.

We are in deep economic waters now in large part because of the consequences of the collapse of a communist system whose demise was the central aim of western foreign policy from 1945 to 1989/91. Those consequences were the well-intended but premature rush towards the single currency; and the further adventures of the deregulators and casino capitalists who were given free rein thenceforth. The Democrats in the US, and the left in the UK and elsewhere, adopted an essentially defeatist attitude towards the prevailing orthodoxy. We now have a somewhat inchoate protest outside St Paul's cathedral, an embarrassed clerical establishment and widespread cries of "where on earth is the left?".

David Kynaston, in a preface to the new one-volume edition of his magnificent City of London: The History, says: "Ultimately, for the sake of a decently equitable society, for the sake of a more balanced economy, for the sake of the health of our democracy vis-a-vis the almighty markets and for the sake of the preservation of financial stability through proper regulation, we have only our politicians to look to – and they have let us down badly."

It is well established that the squeeze on average real incomes in the US began decades ago, and has now reached these islands. There were plenty of productivity gains in the 1920s but, as Sir Dennis Robertson noted long ago, most of the proceeds went towards the asset price bubble. Similarly, in recent years the fruits of economic growth have not been fairly shared, the definitive example being the 49% pay rise (on average) that Britain's top executives awarded themselves last year to celebrate the fact that "we are all in this together".

In Lessons from the Great Depression (1989), the American economist Peter Temin concluded: "Capitalism thrives during economic stability. It wilts in depression." It is certainly wilting now. Where is the revival of business confidence we were promised once the deficit was cut back ? Or not cut back, as Ed Balls pointedly noted last week in his Aneurin Bevan memorial lecture. The shadow chancellor reminded us that Ramsay MacDonald himself had first used George Osborne's favourite phrase, "deficit deniers", to describe those who pointed out that you needed growth to reduce the deficit, not cuts that reduced the growth.